Solid run for AUD/CAD bears in the latter half of July, but is the momentum over and is there a bounce ahead? If so, is it another opportunity to play the downtrend?
Downtrend Bounce in AUD/CAD?
The Australian dollar has been under pressure lately from combination of recent negative geopolitical updates (potential increase of tariffs on Chinese goods into the U.S.; Chinese yuan devaluation) and speculation of further rate cuts from RBA if needed. This played out very well against the Canadian dollar that has had a recent string of positive economic updates, including three months in a row of rising GDP and business sentiment hitting a four month high. Overall, I think the Loonie will outperform the Aussie for now, especially with the interest rate differential in favor of the Loonie, but it might be time for a bounce in the downtrend.
We’ve got a technical signal on the four hour chart that may be pointing towards at least a short-term reversal in the form of bullish divergence between the stochastic indicator and price action. We also saw a strong one way move from around 0.9250 to 0.8915, which is almost three times the weekly ATR, making it a very overdone move.
Looking forward, I think the bounce could be sparked by a negative Ivey PMI update this week from Canada since weaker business sentiment seems to be the trend recently around the world, or the latest Canadian employment data on Friday. If we do get a bounce, I’m looking scale into a short position around the Fibonacci retracement area, which also lines up with the broken support area around 0.9100. My stop will be one weekly ATR from around my average entry price to give the trade room to breathe in the current geopolitically driven environment, and my inital target will be twice the weekly ATR from my average price. Here’s what I’m doing:
Short third position AUD/CAD at 0.9000, max stop at 0.9210, initial target at 0.8820 with 0.33% risk
Short third position AUD/CAD at 0.9050, max stop at 0.9210, initial target at 0.8820 with 0.33% risk
Short third position AUD/CAD at 0.9100, max stop at 0.9210, initial target at 0.8820 with 0.33% risk
I’ll be risking 1.00% of my account if all positions are triggered, and my potential return-on-risk is about 1.6:1 for now. But I’ll look to adjust quickly (i.e., cancel orders, close trade, reverse trade) depending on the latest data and geopolitical developments and how traders react to them.
Stay tuned for updates and as always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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